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Cheap Homeowners Insurance Isn’t Always Better

It can really be helpful to be frugal and make sure you get the most for your money. There are, however, a few things you need to be careful of when purchasing your homeowners insurance. Recently we went over some ways to save money on your policy. Here are some things to avoid.

"Everyone wants to save money," says Loretta Worters, vice president of communications for the Insurance Information Institute (III). "Being 'thrifty' is a good thing…unless it affects you financially."

In order to make sure you don’t buy insurance only because it is cheap, here are four things to keep an eye on.

Your Home Might Not be Protected from Natural Disasters
Catastrophe-related claims accounted for 25 percent of claims costs across the United States during the period from 1997 to 2003, but increased to 39 percent of claims costs from 2003 through 2011, according to a study from the Insurance Research Council (IRC).

Since then we have had storms like Sandy, flooding in Colorado and more. As those types of catastrophe-related claims continue to rise in scope and cost, it's so important to understand what type of insurance you need to be adequately covered.

While standard home insurance policies typically cover damage caused by fire and windstorms, the III notes that floods, sinkholes, and maintenance damage caused by termites or other pests are some of the disasters generally not part of a standard home insurance policy. These are normally an additional charge.Hurricane deductibles are also something to be aware of. They may be as much as 2-10% of your home’s value. Would you have the cash on hand to handle that if it were to happen?

If the answer is "no," don't be cheap and pay for the additional coverage.

Rebuilding Costs Can Be Higher than Market Value
Ask any Realtor and they will tell you that Zillow is not an accurate measure of your home’s value. The same can be said about the cost to rebuild the home, (or parts of it) in the case of a disaster.

Many homeowners make the common mistake of limiting home insurance coverage to the real estate market value, opposed to the cost of rebuilding the home. So what’s the big deal?

"Market value is used to determine the selling price of the home, while rebuilding costs determine the amount of property insurance required for full protection and peace of mind," says Worters. She cautions that not having adequate insurance coverage can cost homeowners far more than expected if they have to file a claim, as there is no correlation between a home's real estate market value and the amount of insurance needed.

Many homeowners have adjusted their coverage in the past several years to reflect the drop in the real estate market. Though many homes may still be very affordable on the market for purchase, the cost to remodel and build has been on the rise for some time. It can be a shock to see how much things really cost to repair the damage.

You May Have Limited Coverage on Liability Protection
Are you thinking of saving that $5 a month by lowering your liability coverage? Just keep your dog locked up and make sure little Jimmy from across the street never sets foot on your property. Besides, nobody would ever sue their neighbor or a friend in the case of an accident, right? Liability coverage protects you in the event that you're at fault for injuries and damage to other people and their property.

"Sure, you can save money on your homeowner's policy by reducing the amount of liability coverage," Worters agrees. "But in today's litigious society, doing so can put you in harm's way financially."

So how much liability coverage is really necessary? A policy will typically have $100,000 in coverage. You may want to look at raising that to $300-500k , an increase that really won’t cost you too much.

Your Personal Belongings May Not Be Covered
Some homeowners try to save money on personal possession insurance by opting for actual cash value coverage instead of replacement cost coverage.

The problem with this strategy is that you are only reimbursed for what the item is now worth, not what it would cost to replace the item if you had to buy a new one. Understand that a 3 year old TV isn’t worth all that much. Neither is a mattress that is 6 years old or the sofa you got before the kids were born. Odds are you would have a huge out of pocket expense trying to replace everything.

A smarter alternative is replacement cost coverage, which pays for the cost of replacing your home or possessions without a deduction for depreciation (up to the limit of your policy). Also, find a way to keep and document your items. In the case of a major disaster, you don’t want to miss anything.

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